Industrial growth slows down in January, inflation hits a 4-month high

NEW DELHI: Industrial growth slipped in January, failing to build on modest recovery in the month before while consumer inflation inched up in February though remaining well below the central bank’s target, strengthening the case for another rate cut in the next monetary policy review.

In the first 10 months of the current fiscal (April to January), IIP growth was higher at 4.4%, compared with 4.1% in the year earlier.

Inflation, as measured by the Consumer Price Index (CPI), rose to a four-month high of 2.57% from 1.97% in January, data released by the statistics office on Tuesday showed.

The simultaneously released Index of Industrial Production (IIP) showed a 1.7% rise in industrial output in January. Industrial growth was 2.6% in December, revised upward from 2.4% estimated initially.

Retail inflation has stayed below the Reserve Bank of India’s (RBI) medium-term target of 4% for the seventh straight month and has opened up the possibility of more rate cuts as industrial growth remains tepid.

“With inflation remaining below RBI’s target, inflationary expectations declining and growth profile weakening, RBI may frontload its monetary easing in the beginning of FY20,” said Devendra Kumar Pant, chief economist, India Ratings. The RBI last month lowered the benchmark repo rate by 25 basis points, its first rate cut in 17 months.Poor Start to the Fourth QuarterOne basis point is one-hundredth of a percentage point.

“On monetary policy, we expect another rate cut in the April meeting and subsequent action would be data dependent,” said B Prasanna, head, global markets group, ICICI Bank.The industrial growth data for January marks a poor start to the fourth quarter of the fiscal year after India’s economy slowed more than expected in the third at a six-quarter low of 6.6%, dragged down by lower growth in agriculture and liquidity constraints faced by the economy.

NON-FOOD WORRIESNon-food items and services pushed overall consumer inflation upward despite a decline in food inflation to 0.66% in February from 2.24% in January.

The Central Statistics Office revised the headline inflation for January to 1.97% from 2.05% earlier.

In the food category, inflation eased in vegetables, sugar and fruits, highlighting the stress in agriculture. The government had announced an annual income transfer scheme for small farmers in the interim budget on February 1 in response to this.Inflation in key services such as health and education was 8.82% and 8.13%, respectively, which drove consumer inflation upward. “We still believe there is even chance of a rate cut in the next policy review meeting as gross domestic product growth and IIP growth have been low, which will make the MPC consider giving further impetus to growth,” said CARE Ratings chief economist Madan Sabnavis.

FACTORY OUTPUT FALLSManufacturing, which constitutes 77.63% of IIP, grew 1.3% in January while electricity generation was up marginally at 0.8%. Mining output rose 3.9%.

Consumer durables output, an indicator of urban demand, increased1.8%, much slower than 7.6% in January last year. There was growth in 11 of the 23 industry groups in the manufacturing sector.

Factory output was in line with the performance of the eight core infrastructure industries whose growth slowed to a 19-month low of 1.8% in January.

In the first 10 months of the current fiscal (April to January), IIP growth was higher at 4.4%, compared with 4.1% in the year earlier.

“The two lead indicators of IIP — primary goods and intermediate goods — portray a weak industrial growth profile. While election-related expenditure may provide some support, probability of lacklustre IIP growth in coming months is high,” said Pant.

Passenger vehicle sales declined 1.1% in February. Pant said that with capacity utilisation still being low at 74.8% and elections in April-May 2019, an investment demand boost is unlikely. Capital goods output, a proxy for investment activity, contracted 3.2% compared with a 12.4% rise a year earlier.

In fact, segment leaders like Maruti Suzuki, Tata Motors and Hero MotoCorp have reported de-growth of 34.3 per cent, 45 per cent and 20 per cent, respectively giving a clear indication of a prolonged slowdown in the sector.